Hello, and welcome to the Daqo New Energy Second Quarter 2024 Results Conference Call. All participants will be in listen-only mode. Please note, this event is being recorded. I would now like to turn the conference over to Anita Chu, Investor Relations Director. Please go ahead.

Hello, everyone. I'm Anita Chu, the Investor Relations Director of Daqo New Energy. Thank you for joining our conference call today. Daqo New Energy just issued its financial results for the second quarter of 2024, which can be found on our website at www.dqsolar.com. So today, attending the conference call, we have our chairman and CEO, Mr. Xiang Xu; our CFO, Mr. Ming Yang, and myself. The call today will begin with an update from Mr. Xu on market conditions and company operations, and then Mr. Yang will discuss the company's financial performance for the quarter and the year. After that, we'll open the floor to Q&A from the audience. Before we begin the formal remarks, I would like to remind you that certain statements on today's call, including expected future operational and financial performance and industry growth, are forward-looking statements that are made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These statements involve inherent risks and uncertainties. A number of factors could cause actual results to differ materially from those contained in any forward-looking statement. Further information regarding these and other risks is included in the reports or documents we have filed with or furnished to the Securities and Exchange Commission. These statements only reflect our current and preliminary view as of today and may be subject to change. Our ability to achieve these projections is subject to risks and uncertainties. All information provided in today's call is as of today and we undertake no duty to update such information except as required under applicable law. Also, during the call, we'll occasionally reference monetary amounts in U.S. dollar terms. Please keep in mind that our functional currency is the Chinese RMB. We offer these translations into U.S. dollars solely for the convenience of the audience. Mr. Xu will make his remarks regarding current market conditions and company performance in Chinese, which I'll translate into English after he finishes. So now, I'll turn the call to our CEO.

Hello, everyone, this is Anita. I will now translate our CEO Mr. Xu's remarks. The solar industry faced significant challenges during the second quarter, as market prices across the solar value chain dropped below production costs for nearly the entire sector. When the end-of-quarter polysilicon average selling price fell below our production cost, we were required to record a non-cash inventory impairment expense of $108 million according to accounting standards, as our inventory's market value dropped below its book value. This severely impacted our cost of revenue, leading to gross losses, operating losses, and net losses. However, we maintained a robust balance sheet with no financial debt. By the quarter's end, we had a cash balance of $997 million and a combined cash and bank note receivable balance of $1.1 billion. To capitalize on higher interest rates compared to bank savings, we invested $1.4 billion in short-term investments and fixed-term deposits during the quarter. Including these investments, we had sufficient liquidity with quick assets totaling $2.5 billion. Operationally, during the second quarter, we commenced initial production at our 100,000 metric tons Phase 5B polysilicon project in Inner Mongolia as planned, which accounted for about 12% of our total production volume. Overall, our two polysilicon facilities produced 64,961 metric tons for the quarter, surpassing expectations and showing an increase of 2,683 metric tons compared to the previous quarter. Through ongoing R&D investments and a commitment to purity improvements at both plants, our N-type product mix reached 73% during the quarter. Notably, even our Phase 5B, which was in the ramping up phase, achieved a 70% N-type product mix, reinforcing our confidence in reaching a 100% N-type mix by the end of next year. Additionally, our production cost further decreased in the second quarter, down 3% from Q1 2024 to an average of $6.19/kg. Given the current market conditions, we have revised our target production utilization rate for the third quarter and adjusted our production plan for the year. We expect our Q3 2024 total polysilicon production to be about 43,000 to 46,000 metric tons, as we initiated maintenance and reduced our production utilization rate to support pricing and minimize cash burn. Consequently, we now anticipate our full-year 2024 production volume to be in the range of 210,000 to 220,000 metric tons. During the second quarter, the market sentiment for solar was low, and customers displayed little interest in purchasing products. Consequently, polysilicon prices consistently hit new lows, falling below production and cash costs. Prices dropped from slightly above RMB60 per kilogram on average in early April to between RMB40 and RMB55 per kilogram by late April, with further declines to below RMB40 per kilogram towards the end of June. Sales pressure intensified as the industry's polysilicon inventory rose from about 18 days to over 1 month of production. With prices falling below the industry's cash cost and rising inventory levels, we started to observe maintenance and production cuts across the sector. According to industry statistics, polysilicon production in China fell about 16% from approximately 192,000 metric tons per month in April to around 162,000 metric tons in June. Nevertheless, polysilicon supply still exceeded wafer customer demand, which declined to about 50 gigawatts in June due to reduced utilization rates. Going forward, July will require increased demand from downstream manufacturers to facilitate inventory reduction and price recovery, despite further industry production cuts. The solar industry has seen multiple cycles in the past, and based on our prior experiences, we believe that the current low prices and market downturn will eventually lead to a healthier market as poor profitability, losses, and cash burn cause many industry players to exit, potentially leading to some bankruptcies. This will induce necessary capacity rationalization, addressing the current overcapacity and ultimately restoring normal profitability and improved margins in the solar PV sector. This year presents challenges for China's solar PV industry, with manufacturers experiencing weak margins due to oversupply, excessive inventory, and falling prices. We may have reached a cyclical bottom, although clear signs of recovery are not yet evident. We believe selling below cash cost is not sustainable, and many solar firms are grappling with significant cash flow challenges that result in delays in loan repayments and order deliveries. Therefore, market consolidation is likely, with higher-cost manufacturers gradually reducing capacity and exiting the industry. Recently, the China Photovoltaic Industry Association has called on central and local governments, financial institutions, and companies to collaborate on speeding up industry consolidation. Chinese policymakers are also advocating for the healthy expansion of the solar industry. Earlier in July, China's Ministry of Industry and Information Technology released a draft outlining guidelines for solar projects, such as specific electricity consumption requirements and minimum capital ratios for new and expanded projects aimed at ensuring high-quality development in the solar PV industry and eliminating outdated capacity. On the demand side, we witnessed robust growth in new solar PV installations in China during the first half of 2024, reaching 102.48 gigawatts, marking a 30.7% year-over-year increase. In the long term, solar PV is expected to be one of the most competitive power generation methods in China, with continued cost reductions in solar PV products expected to significantly boost demand. We believe we are well-positioned to navigate the current market downturn and emerge as an industry leader in capturing future growth. Now, I will turn the call over to our CFO, Mr. Ming Yang, to discuss the company's financial performance for the quarter. Ming, please proceed.

Thank you, Mr. Xu and Anita. Hello, everyone. This is Ming Yang, CFO of Daqo New Energy. We appreciate you joining our earnings conference call today. I will now go over the company's second quarter 2024 financial performance. Revenues were $220 million, compared to $415.3 million in the first quarter of 2024 and $637 million in the second quarter of 2023. The decrease in revenue compared to the first quarter of 2024 was primarily due to a decrease in the ASP, as well as decreased sales volume. Gross loss was $159 million, compared to our gross profit of $72 million in the first quarter of 2024 and $259 million in the second quarter of 2023. Gross margin was negative 72%, compared to 17.4% in the first quarter of 2024 and 40.7% in the second quarter of 2023. For the second quarter of 2024, the company recorded $108 million in inventory impairment expenses as the company's inventory's market value fell below book value. The decrease in gross margin compared to the first quarter of 2024 was also due to lower ASP, which was partially mitigated by lower production cost. SG&A expenses were $37.5 million, compared to $38.4 million in the first quarter of 2024 and $43.3 million in the second quarter of 2023. SG&A expenses during the second quarter included $19.6 million in non-cash share-based compensation cost related to the company's share incentive plans compared to $19.6 million in the first quarter of 2024. R&D expenses were $1.8 million, compared to $1.5 million in the first quarter of 2024 and $2.2 million in the second quarter of 2023. R&D expenses vary from period to period and reflect R&D activities that take place during the quarter. Most of our R&D activities have been around increasing our N-type percentage. As a result of the foregoing, loss from operations was $196 million, compared to income from operations of $30.5 million in the first quarter of 2024 and $214 million in the second quarter of 2023. Operating margin was negative 89%, compared to 7.3% in the first quarter of 2024 and 33.6% in the second quarter of 2023. Foreign exchange loss was $1.4 million, compared to $0.3 million in the first quarter of 2024, which is attributable to the volatility and fluctuation of the U.S. dollar and Chinese Yuan exchange rate during the quarter. Net loss attributable to Daqo New Energy shareholders was $120 million, compared to net income of $15.5 million in the first quarter of 2024 and $103.7 million in the second quarter of 2023. Loss per basic ADS for the quarter was $1.81, compared to earnings per ADS of $0.24 in the first quarter of 2024 and $1.35 in the second quarter of 2023. Non-GAAP adjusted net loss attributable to Daqo New Energy shareholders, excluding non-cash share-based compensation cost, was $98.8 million, compared to adjusted net income non-GAAP attributable to Daqo New Energy shareholders of $36 million in the first quarter of 2024 and $134.5 million in the second quarter of 2023. Adjusted loss per basic ADS was $1.50, compared to adjusted earnings per basic ADS of $0.55 in the first quarter of 2024 and $1.75 in the second quarter of 2023. EBITDA was negative $145 million, compared to $76.9 million in the first quarter of 2024 and $230 million in the second quarter of 2023. EBITDA margin was negative 66%, compared to 18.5% in the first quarter of 2024 and 36% in the second quarter of 2023. Now, on the company's financial condition. As of June 30, 2024, the company had $1 billion in cash and cash equivalents and restricted cash, compared to $2.7 billion as of March 31, 2024 and $3.17 billion as of June 30, 2023. And as of June 30, 2024, the notes receivables balance was $80.7 million, compared to $194 million as of March 31, 2024 and $798 million as of June 30, 2023. Notes receivables represent bank notes with maturity within six months. As of June 30, 2024, fixed term deposits within one year balance was $1.2 billion compared to nil in previous periods. For the six months ended June 30, 2024, net cash used in operating activities was $278.6 million compared to net cash provided by operating activities of $786 million in the same period of 2023. For the six months ended June 30, 2024, net cash used in investing activities was $1.7 billion compared to $496 million in the same period of 2023. The net cash used in investment activities in the second quarter was primarily related to the purchase of short-term investments and fixed-term deposits, which amounted to $1.4 billion. Regarding the company's purchase of property, plant, and equipment, for the first six months of this year, this amounted to $292 million. We currently anticipate full-year capital expenditures in the range of $550 million to $600 million, which is a further reduction from our earlier plans. Capital expenditure for the second half of 2024 is, therefore, expected to be in the range of $260 million to $310 million. Capital expenditure for the year is primarily related to our Inner Mongolia polysilicon project, Phase 1 and Phase 2. For the six months ended June 30, 2024, net cash used in financing activities was $43 million compared to $477 million in the same period of 2023. The net cash used in financing activity in the second quarter of 2024 was primarily related to dividend payments and share repurchases by our company's finance subsidiaries. And that concludes our prepared remarks. We will now open the call to Q&A from the audience. Operator, please begin.

We will now begin the question-and-answer session. The first question comes from Phil Shen with ROTH Capital Partners. Please go ahead.

Hi, this is Matt Ingraham on for Phil. Thank you for taking our questions. Looking ahead, can you give us a sense of pricing and cost structure beyond this year? Do you think that there could be some recovery in price next year? And how much room do you have to lower the cost structure?

Hello. This is Ming, CFO of Daqo New Energy. Thank you for your question. I think in recent months, particularly in August, we've already seen some pickup and recovery of pricing. As Anita said at the bottom, in terms of June and July, pricing was below RMB40 per kilogram. As of now, pricing is in the range of RMB41 to RMB42 per kilogram. So, we saw a range somewhere in between RMB2 to RMB3 per kilogram in terms of price recovery. This is primarily a result of the industry's production reduction and a slight uptick in demand from customers. We do not think the current pricing is sustainable. We believe that over the rest of the year, we should continue to see likely between RMB2 to RMB4 price recovery as production continues to remain at a lower level. For next year, we believe that as demand continues to improve, especially from new markets like the Middle East, Latin America, and Africa, further market developments in China and Europe, we think that pricing should recover to at least production costs or maybe normalize to higher than production costs. We think mid-next year is when we will see normalized pricing for polysilicon.

Great. Thank you.

And then, quickly following up on your cost structure, we do think there continue to be opportunity to reduce cost. I think we're seeing very successful cost trends from the Inner Mongolia Phase 2 facility. We saw approximately a 3% reduction of cost from Q2 to Q1. We expect that Q3 costs should be flat to slightly lower than Q2. So, we think in the second half, overall, we should see costs somewhere around $6 or even slightly lower than $6. We think this cost structure should continue through next year.

Really appreciate the color there. And then, can you just talk about the channel inventory in the market? Do you expect that to continue to grow in the near term? And where do you think that peaks?

Actually, channel inventory has already peaked. Inventory is actually coming down as of August and we think this should continue to go down primarily as a result of continued reduction in supply. We think it should probably reduce to a much more reasonable level by Q4 or by the end of the year. Unless we see some kind of meaningful price recovery, at least above the industry cash cost, we're very unlikely to see improvements in production.

Okay, great. Thank you for the color. I'll pass it on.

Great. Thank you.

The next question comes from Alan Lau with Jefferies. Please go ahead.

Thanks for taking my question. So, I would like to know about the breakdown on the impairment of $108 million, because it appears that the production volume is higher than sales volume for 20,000 metric tons. Is 20,000 metric tons a fair assumption on the inventory level by end of Q2? If that is the case, an impairment of $108 million seems huge. So, we'd like to know the basis on that.

Okay. The reality is, the $108 million is a reduction in not just finished goods, but also work-in-process inventory and raw material, which reduces our cost from our production cost, say, around $6.19 per kilogram to the current market pricing, which is below RMB40 per kilogram. About 60% of that is related to finished goods inventory. Looking at our inventory at the end of the quarter, approximately 28,000 metric tons. So, we built roughly 20,000 metric tons of inventory during the quarter because of the market conditions and weak demand. Although I think, starting in August, we're starting to see a reduction in inventory right now.

Thank you. If 60% is finished goods, it suggests that about $60 million to $70 million of the impairment is tied to 28,000 tons. This translates to approximately $2 to $3 per kilogram. Does this seem substantial? The difference between the average selling price and the production cost is merely $1 per kilogram. I would like to clarify if I overlooked any details regarding this.

I think, realistically, if you look at pricing, especially, where we have to reduce our inventory to, somewhere in the range of RMB37 to RMB38 per kilogram.

So, the ASP is RMB37 or RMB38, but your production cost is only around RMB40-something. So, if the impairment...

Right now, RMB45.

Yeah, that's around RMB12. If it’s 28,000 metric tons, then it should be at most $300 million maybe. Since the impairment amount...

Well, there are also raw materials, and work-in-process inventory is being reduced as well.

I see. So, maybe we will move on to the guidance. I have noticed that the production volume guidance for the third quarter and the second half has been significantly reduced. I would like to understand the reasoning behind this. Is it to preserve cash? Additionally, do you see that your peers have also cut their production volumes?

Yes. Most of our peers, except maybe one major player, have significantly reduced utilization due to the current market pricing environment. Given these conditions, we need to balance production maintenance with minimizing cash burn and losses in the most economical way. We believe that our current utilization level is the most prudent and effective approach to reduce cash burn, especially since it remains below cash cost.

So, there is effectively around 70% of utilization, right? So, will this impact the production cost or is it okay?

It's actually, I would say, overall, very minimal impact on production cost. I think only RMB1 to RMB2, because almost 80% of our cost is what we call variable costs, which is electricity and energy and other consumables like steam and graphite and silicon seed rod.

Understood. Regarding the fixed deposit of an investment in RMB1.4 billion, I would like to know how long those investments are and how liquid are those? So, basically, the question is related to buybacks; because I'd like to know the liquidity of the company on that front.

Almost all of the fixed investment and term loans were purchased by the Xinjiang Daqo subsidiary. In terms of the U.S. ListCo and our cash balance, virtually all of it is in liquid savings accounts or money market funds. That $1.4 billion is primarily in six-month fixed-term deposits with Chinese domestic banks or a higher interest savings product offered by the banks.

I see. So...

And that maturity age is within three months.

Oh, within three months, right?

Yes.

I see. So, my last question is basically on the buyback. The company has launched a $100 million buyback program. I would like to know if the company is going to continue on the buyback and what the planning of the buyback is. Like, which price do you think is appropriate or do you think the current stock price is at the level where you think the company will actually accelerate the buyback?

Thank you, Alan. In terms of the share repurchase program, we are authorized in the amount of $100 million back in July. We definitely think that our stock is undervalued, but in terms of the pace, we will be contingent upon the market conditions and we'll be more opportunistic in terms of the repurchase.

So, we're going to look for opportunities to repurchase as many shares as possible for the company to maximize the money that we spend in terms of its effectiveness.

I see. And yes, you have explained, so the cash is already there at the U.S. level. So, probably, it's going to still go ahead this year, right?

That's our current assumption, yes.

I see. Thank you. So, I'll pass on. Thank you.

Great. Thank you, Alan.

The next question comes from Rajiv Chaudhri with Sunsara Capital. Please go ahead.

Good morning. My first question is about the fully-loaded cost that you will incur in Q3 and Q4. If you are reducing the utilization rate, shouldn't that actually increase your fully-loaded costs compared to the third quarter?

Well, I think, interesting, that has to do with the cost structure of polysilicon production. Roughly 35% to 40% is electricity, and then another 35% is silicon metal. Majority of other costs is mostly consumables like graphite, the silicon seed rod, and the packaging. If we look at what we would call variable costs — where we don’t produce, we don’t buy silicon metal, we don’t buy the consumables — these represent actually more than 80% of the cost. The remaining 20%, approximately 13% is depreciation, which is the non-cash portion. Yes, overall depreciation expense will aggregate over a smaller volume, but I think the overall impact is not that much because it's not a huge portion of our costs. Regarding labor, which is roughly 6% of our cost, we're optimizing our staffing level, meaning we're reducing labor cost by between 10% to 20%. So, the overall impact is not that significant as we maintain production because we're reducing production by what, maybe 30%, 35%, something like that relative to previous levels.

A second question is related to the difference between production and sales. You will produce 210,000 tons to 220,000 tons, but the sales are likely to be higher than that, right? I mean, if you expect inventories to get back to normal by the end of the year, then sales are likely to be around 240,000 tons to 250,000 tons? Is that the right way to think about it?

I can only say that you're referring to the full year. Realistically, in the first half, we built inventory, so the volume was less than production. In the second half, we anticipate seeing more sales than production.

Right.

But again, it's early; it's only August. It really depends on how much more sales we can achieve relative to production.

I see. But for the year as a whole, you expect sales to be greater than production, right?

It's difficult to tell, to be honest. Difficult to tell. It's really up to Q4 performance.

I see. Okay. Can you give us any specific examples of companies that are of competitors who are actually closing shop as distinct from just reducing their output right now?

A well-known case that happened recently is a company called Runyang, which has a nameplate of over 100,000 metric tons. That company was in financial crisis, where they had problems repaying their bank loans and had major issues repaying their suppliers and paying interest. Our understanding is they're being consolidated by Tongwei. Tongwei is doing due diligence on them right now. They have significantly reduced production. We know of two other cases where we're not going to say the companies' name, but one new entrant actually built a 50,000 metric ton facility that never even started; that facility remains idle. There's another peer competitor; they’ve claimed to have built approximately 100,000 metric tons to 200,000 metric tons of capacity, but our understanding is the volume that they're selling to the market is actually fairly trivial. These are the cases that we know of right now.

So, when you look at the year as a whole, 2024 as a whole, do you think that with the sales that you will do, which will be around your total production levels, that you would have gained or lost market share in 2024?

At least based on the latest industry production statistics, even though we reduced utilization, we're still maintaining market share. Based on our current production level, we're roughly around 15% of the market.

But your total output would be about 10% higher than last year or, I should say, maybe your total sales will be about 10% higher than last year, right? Do you think that is roughly the growth rate of the market this year, 10%?

It really depends on, especially Q4. Our production and sales volume in the first half were relatively healthy. Q2, it came down. At this point, we're expecting our Q3 sales volume and shipments to be above Q2. Q4 is looking, at least for now, like a positive trend. If I look at industry statistics, I think it's still expecting roughly a 20% improvement.

Okay.

Maybe more than 20%.

Thank you.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Anita Chu for any closing remarks.

Thank you, everyone, again, for participating in today's conference call. Should you have any further questions, please don't hesitate to contact us. Thank you, and have an awesome day. Goodbye.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.